Tuesday, April 24, 2012

Over
the past weeks and months, we've been subjected to conflicting data regarding
the state of the housing market in the United States with some data releases
showing an improvement in housing and other data showing that we are not at the
bottom. The folks at the St. Louis Federal Reserve have some interesting
data that gives us some perspective on how the housing market looks compared to
its past history as measured by the number of authorized new private housing
units building permits or PERMIT in FRED lingo.

Here
is a graph showing the number of building permits (in thousands) over the past
three years:

Since
the depths of the Great Recession, building permits have risen from their nadir
of 513,000 units annually in the month of March of 2009 to their current annual
level of 780,000 units in the month of May 2012, an improvement of 52 percent. That appears to be an incredible turnaround, suggesting that the
housing market is really starting to take off. In the last year alone,
housing starts have risen by 156,000 units or 25 percent. If that isn't
a recovery, I don't know what is.

But,
wait a minute. Let's look back a bit further in time to see how the
current monthly new housing permit data looks compared to what it looked like
over the past decade:

That
looks a bit different, doesn't it? The annual rate of new private housing
unit permits actually peaked at 2.263 million in September of 2005 and sat at
the over two million mark for most of 2004 and 2005. It wasn't until
mid-2006 when new permits began to fall, dropping from 2.212 million in January
2006 to 1.638 million by December 2006, a drop of 25.9 percent over the year. If
we take the peak value of 2.263 million permits and compare it to the current,
relatively good looking value of 780,000 permits, the drop is a rather stunning
65.5 percent. Over the decade from March 2002 to March 2012 alone, the drop
from 1.691 million permits to the current level is a slightly less impressive
53.9 percent.

Now,
let's look at all of the data that FRED has for PERMIT going back two
generations to January 1960 when most baby boomers were still wearing either
diapers or short pants:

Over
the past 52 years, all but seven of the lowest monthly permit numbers (between
513,000 and 747,000) are from the years between 2009 and 2012. To put all of the data into perspective, the March 2012 permitting number of 747,000 is the 48th lowest out of the 626 data points in the FRED database.As well, our frame of reference, the March 2009 data point, is the lowest number of permits over the past 52 years. The other
seven lowest months were from 1966, 1975 and 1981, years when the population of
the United States was a fraction of what it is today as shown on this chart:

When
the population data and the annual housing permit data is combined, we can
quite quickly see that the current per capita permit data is actually very
weak. If we take the per capita permitting number for December 1960 and
compare it to the per capita permitting number for March 2012, the March 2012
permitting level is only 41 percent of the 1960 level. Obviously, that is
a very major decline.

When we're digesting how well America's housing market is
doing from the weekly and monthly housing data releases which are generally
viewed on a year-over-year basis, I think that this data shows us that we have
to compare recent data releases with a view to a much longer-term horizon. While
the mainstream media may be insinuating that the next housing market boom is
just around the corner, historical data tells us that we are still mired in the
after-effects of the Wall Street-manufactured Great Recession and that by the
time the next recession rolls around, single family home permitting and
building levels are not likely to be back to historical norms. We still have a very long way to retrace our path back to housing market normalcy.

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About Me

I have been an avid follower of the world's political and economic scene since the great gold rush of 1979 - 1980 when it seemed that the world's economic system was on the verge of collapse. I am most concerned about the mounting level of government debt and the lack of political will to solve the problem. Actions need to be taken sooner rather than later when demographic issues will make solutions far more difficult. As a geoscientist, I am also concerned about the world's energy future; as we reach peak cheap oil, we need to find viable long-term solutions to what will ultimately become a supply-demand imbalance.